Walmart targets rival's rejected Zellers stores

Target chose not to open former Zellers stores Walmart plans to purchase. (CHARLES REX ARBOGAST / THE ASSOCIATED PRESS ARCHIVES)

TORONTO -- Walmart Canada will target urban shoppers in its purchase of former Zellers stores under a deal with rival Target, as it also ramps up plans for renovations ahead of its discount competitor's arrival on Canadian soil.

David Cheesewright, chief executive of Walmart Canada, said Tuesday the locations of the up to 39 stores it will acquire from Target will be revealed in the next few days.

Although the locations were passed over by Target under its $1.8-billion deal with Hudson's Bay Co. to acquire the leases for up to 220 Zellers locations, Cheesewright said he's satisfied they are desirable.

"We'll only be focusing on sites where we don't have a Walmart nearby or it gives, particularly in urban areas, people access to Walmart who would have to drive a long way before," he said in an interview.

As for Target's hotly anticipated 2013 Canadian launch, Cheesewright said Walmart isn't threatened because the retail landscape is already ultra-competitive. But he does concede Walmart will "make a few tactical tweaks" before its arrival.

The chain's priority is developing supercentres -- one-stop shops that offer groceries in addition to low-priced clothing and household items. It already has 148 supercentres in Canada and plans to revamp 40 more of its 330 stores in each of the next three years.

But it is also opening a trial small store location in the Scarborough area of Toronto to test whether shoppers will visit a smaller-format Walmart store. At 90,000 square feet, the store is about two-thirds the size of a typical Walmart and Cheesewright said the company sees opportunity for more.

Walmart also believes it has an advantage over Target and other U.S. retailers making the trip north because it has had 17 years to adapt to local Canadian cultures and demands. In Quebec, for example, the chain includes a number of locally sourced products and also carries a wider array of cheese and deli products.

"All of them underestimate Canada is a very different marketplace from the U.S. It's certainly one of the most diverse countries I've ever seen," he said.

"It's taken us a long time to get there and it's tough for a new entrant to replicate."

Walmart stands to be the biggest loser from Target's entry into the Canadian market as the two stores have the greatest overlap -- including grocery, pharmacy, clothing and home products, said Brian Yarbrough, a retail analyst at Edward Jones in St. Louis, Mo.

"I'm pretty confident Target's going to take some share away from Walmart," he said.

At the same time, it's not like Target is coming in and opening a slew of new stores; instead, they're taking over existing stores, which already pull in about $3 billion worth of sales a year, he said.

"Zellers already does a decent amount of sales, so some of the sales they're going to get are going to be current Zellers customers," he said.

"But the market's only so big, so Target's going to take some share from everybody."

Target is expanding to Canada in a similar way Walmart did in 1994, when it bought the chain of Woolco department stores in Canada, refurbished them and renamed them under the Walmart banner.

Walmart already keeps a close eye on the prices at the Canadian competition, Cheesewright said, listing Shoppers Drug Mart (TSX:SC), No Frills (TSX:L) and Canadian Tire (TSX:CTC.A) as some of the toughest domestic brands.

Canada's grocery giants have complained about Walmart's entry into the supermarket space for adding pressure in a super-competitive environment, in which chains are forced to maintain low margins on top-selling items to attract shoppers.

Walmart dedicates a team to making sure its prices are 10 per cent cheaper than average in Canada. To maintain a competitive edge, Cheesewright said, the retailer monitors flyers and prices at some 60 local competitors across Canada.

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